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Poznan Dispatch: Carbon Bashing

Think you've had a rough week? Try being a carbon credit. Here's what happened in just a few days: First, the price of Certified Emissions Reductions (CERs), used by carbon traders, tanks. Then, the U.S. Government Accountability Office issues a report questioning the efficacy of the EU Emissions Trading Scheme and Kyoto Protocol in slowing carbon emissions growth. And finally, U.N. climate officials in Poznan find themselves on the defensive explaining why a flawed carbon-trading tool, the Clean Development Mechanism, or CDM, shouldn't be scrapped altogether.

There's a lot at stake: billions of dollars in CER sales, manufacturers that depend on CDM-based funding, the supply-chain businesses that support those manufacturers, their workers and their families, oh, and the environment, of course.

Why have carbon credits been roughed up? Oil prices took the first swing. When they dropped to $44 a barrel, CERs suddenly didn't look so important, and their value dropped. According to Carbonpositive.net, a benchmark CER contract dipped below €13 in trade on the European Climate Exchange this week, closing at €12.98 on Dec. 9. Next, there was that GAO report whose release, requested by Rep. Joe L. Barton, R-Texas, coincided with the Poznan talks for maximum media impact. And then there were Poznan sessions on the CDM that will probably will remain unresolved as the UNFCCC talks move to Copenhagen. Also, for good measure, the UNFCCC announced it suspended one of the largest auditors of clean energy projects, DNV of Norway, for five "non-conformities" relating to its practices.

The CDM has been a thorny issue since it became operational under the Kyoto Protocol in 2006. One of the problems, critics have long argued, is that selling CERs has become such a lucrative industry that some manufacturers are purposely creating pollution -- just so they can turn around and earn salable CERs by abating the pollution.

The question is whether the pollution and its abatement would have existed had the CDM not been created.

Gujarat Fluorochemicals Ltd. (India), a public limited company that became owner of the world's largest CDM project on Feb. 25, 2005, says the CDM is important. Its project involves the thermal destruction of a powerful greenhouse gas called HCFC23, created as a by-product of HCFC22, a widely used coolant in air conditioning units, such as those found in data centers. Gujarat Fluorochemicals is one of the world's largest producers of HCFC22. In a 2003 application for registration to sell CERs, the company notes: "The installation of thermal oxidation facility would not only make GFL contribute to society by restricting release of GHG but would give economic and technical benefits to the country by providing direct and in-direct employment and transfer of thermal oxidation technology to the country and thus contributing to sustainable development."

As far as I know, the manufacturer hasn't been singled out by any critics. But its aggressive market-driven approach to cleaning up the environment illustrates their point. Carbon trading is now listed on the company's Web site as one of the company's four business areas, along with the manufacture of PTFE (found in nonstick cookware and in the sheathing of computer cables), refrigerants and chemicals:

GFL expects to generate more than 3 million tons of CERs annually, which is expected to go up in the future as HCFC22 production grows. These CERs can be traded internationally and can be used as a compliance tool under the Kyoto Protocol as well as several other trading markets like the EU Emissions Trading Scheme.

The project was developed by Gujarat Fluorochemicals with INEOS Fluor, the technology sponsor; financed by Rabobank of the Netherlands and Sumitomo of Japan; and audited by SGS United Kingdom Ltd. Based on a CER market price of $20 -– it has fluctuated between $10 and $40 –- Gujurat Fluorochemicals stands to generate $60 million a year by incinerating HCFC23. That's no small chunk of change when you consider the company's annual profits are about $100 million.

Gujarat Fluorochemicals's CER sales would rise, as the company expects its HCFC22 production to increase.

While acknowledging the duality of its interests –- polluting on one hand, cleaning up with the other -- Gujarat Fluorochemicals defends itself in an October 2004 letter to the CDM Secretariate of the U.N. Framework Convention on Climate Change:

"It is possible to argue that CDM may make some plants more competitive than others, and hence, could lead to increased HCFC22 production at these plants. Therefore, the
argument could possibly go, the global warming potential of the increased HCFC22 production must be considered for determining the CERS that these plants would be eligible to. However, it must be recognized that since increased HCFC22 production at these sites would be matched by a corresponding reduction in HCFC22 production elsewhere (based on the premise that CERs will not cause global HCFC22 production to increase -- see 2.1 above), there would not be any impact on global warming caused by increased HCFC 22 production due to the CDM project activity.

Secondly, it must also be recognized that most of the HCFC22 production facilities in India and China, due to their inherent cost competitiveness, have had reasonably healthy production growth rates. Since these growth rates were achieved without considering that CFC has a global warming potential much higher than HCFC, from a methodological perspective, for swing plants, the increased HCFC22 production would actually reduce global warming, due to reduction in CFC production."

London-based market researcher New Carbon Finance analysis indicates that China is likely to derive €1.8 billion a year from the CDM; India, €600 million a year.

The Gujarat Fluorochemicals letter continues:

"Lastly, not all incremental HCFC22 production could lead to global warming. ... HCFC22 used in PTFE as feedstock does not have any global warming potential. Around 30% of HCFC22 is presently used in PTFE manufacture, and this is expected to go up to around 50% of HCFC capacity by 2010. Furthermore, some HCFC22 may be used in countries where it will be recycled or destroyed in Montreal Protocol driven recovery / destruction schemes."

The CDM already has registered more than 1,000 projects and is anticipated to produce CERs amounting to more than 2.7 billion tons of CO₂ equivalent in the first commitment period of the Kyoto Protocol, 2008–2012. Now, how much of that could have been avoided?

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